Publish Date - June 10, 2020
Author: Abby Drexler
5 Personal Finance Tips for Paying Off Your Car Loan
Approximately 70 percent of the people who purchase cars in the United States secure a car loan to do so. A loan that is used to purchase a car is one of the biggest financial responsibilities most people will bear in their lifetime.
Approximately 70 percent of the people who purchase cars in the United States secure a car loan to do so. A loan that is used to purchase a car is one of the biggest financial responsibilities most people will bear in their lifetime. And if you are not careful, your car loan could be the cause of serious debt. Car owners who do not want their finances to be negatively affected by a car loan should make use of the following personal finance tips to rid themselves of this debt as soon as possible.
One neat trick you can use is to divide your total car payment by two and pay the amount you discover twice a month. When you do so, you will pay one-half of your car note 26 times a year. This is equal to 13 months of payments in a year's time versus the 12 months you will pay if you follow the conventional monthly payment model.
You will also pay less interest over the lifetime of your car loan if you make bi-weekly payments. This is because your loan balance will decrease faster with bi-weekly payments. Lower loan balances equal less interest accrued over time.
You can also realize significant savings on your car loans by rounding all your payments up to the nearest $50 point each month. For example, a $10,000 car loan at 10 percent interest over a 60-month term will mean a monthly payment of about $212. You will pay more than $2,700 in interest over the life of your loan if you make your monthly car payment as required.
However, rounding your payment up to $250 a month will allow you to shave 13 months off the length of time it will take for you to pay off your car loan. You will also save more $500 on interest.
Make a Large Payment Each Year
This method is the equivalent of paying the money you would have contributed through rounding your monthly payments up on a monthly basis all at once. If the same $10,000 was borrowed on a 60-month term with 10 percent interest as in the example above, you can save $468 a month on interest by making one $500 additional payment toward your loan per year. You will also reduce the amount of time it takes to pay off your loan from 60 months to 49.
If your financial life changes significantly at some point during the repayment of your car loan, you may benefit from refinancing. However, you should only refinance your car loan if your monthly payments and possibly the term of your loans are reduced. One financial life change that can make this possible is an improved credit score. Actions you can take to improve your credit score include:
- Pay off your debt
- Fix discrepancies in your credit report
- Wait out collections
- Reduce your debt-to-income ratio
Don't Pay for Things You Don't Need
Read all the documents that pertain to your car loan carefully. It is possible it contains charges for services, warranties, and other extras that are no use to you. You may be able to lower the amount you pay on the loan each month by canceling these extras.
The fees attached to missing or late payments are also an expense you do not want for yourself. You can guard against forgetting to drop off a car loan payment and causing yourself to spend more money by setting up electronic payments that are sent automatically. Also remember, missed payments can negatively affect your credit score which might make monthly payments on future auto loans more costly.
Many car owners in America borrow money to purchase the car they desire. And while the car may be something you want to possess for a considerable amount of time, you will do well for yourself to dispose of the loan attached to it as soon as possible. The five financial tips profiled above provide a solid foundation for reducing both the interest and time you pay for a car loan.